Aldyen Donnelly: The many holes in BC’s carbon plans

(June 10, 2010) There is a conflict between British Columbia’s public revenue requirements as presented in the Province’s official Fiscal Plan and the Premier’s suggestion that BC will proceed with “cap and trade”-type regulation for industrial Greenhouse Gas emissions.

The first table below shows the BC Finance Carbon Tax revenue forecast—and comes directly from Table A9, page 159 of the BC Fiscal Plan, which can be downloaded here.

The second table is simple arithmetic. The official budget document clearly states that the BC carbon tax rate will be $30/TCO2e in 2012/13, and revenues from that tax will total $1.137 billion in that fiscal year. Dividing the rate into the revenue forecast tells us that the Minister of Finance is forecasting that consumption for taxable carbon-based products will INCREASE from 36.13 MM TCO2e/equivalent to 37.90 MM TCO2e-equivalent worth of product between Fiscal 2009/10 and 2012/13.

At 4.9% over 3 years, this would mean the Minister of Finance is forecasting that—in spite of the BC CO2 tax and the threat of a cap and trade regime—per capita demand for carbon-based fuels in BC will increase at a higher annual average rate than any historical three-year average since 1990.

In other words, the recent budget reflects the Minister of Finance’s opinion that BC consumers’ demand for taxable carbon-based fuels will explode, relative to recent and mid-term historical norms, notwithstanding the CO2 tax.

Perhaps more importantly, this budget forecast causes me, at least, to question the sincerity of the Premier’s apparent commitment to “cap and trade”.

If you don’t know, I oppose the implementation of a US-style cap and trade regime in BC, because “cap and trade” always favours carbon-intensive economies at the expense of economies that were more efficient—like BC’s—before the cap and trade quota allocation was introduced. Therefore, it will be devastating for private investment in BC value-adding manufacturing capacity if BC implements any US or WCI-style “cap and trade” quota-based carbon commodity supply management regime. For this reason, I can only hope that the signal sent in BC’s most recent budget—that BC cap and trade is dead at least in the short term—is intentional and not simply a budgeting error.

What is the conflict between the recent BC budget and “cap and trade” implementation?

The BC Premier and Minister of Finance have, in the past, repeatedly assured all private sector owners of large GHG-emitting stationary plants that if/when binding GHG reduction obligations and GHG quota allocations are assigned to those plants, they will become exempt from the BC CO2 tax. BC Hydro and other Crown corporations will continue to pay the CO2 tax even when they are also covered by an obligation to acquire and surrender BC GHG quota under the proposed cap and trade regime.

But the potentially GHG-regulated stationary plants currently account for roughly 50% of BC SO2 tax revenues. So if/when the Province implements the proposed “cap and trade” regime, it potentially blows a $500 to $600 MM/per year hole in the provincial revenue forecast.

So my question is: what are the Province’s options?

BC Options:

1. BC will not join any NA cap and trade market before April 2013.

2. The Minister of Finance will renege on prior commitments to BC industry and proceed to “double tax” stationary source GHGs after the cap and trade regime is launched in BC.

3. There is a systemic $500 MM per year hole in the BC budget forecast that is not reflected in the budget forecast that was tabled a couple of months ago—and this is before accounting for income tax and oil and gas royalty revenue risk.

At this time, I think it might prove useful to refer to an illustration that originally appeared in a National Round Table on Economy and Environment technical brief in 2008. In the Technical Report support the National Roundtable’s 2009 publication “Achieving 2050: A Carbon Pricing Policy for Canada” (page 36), Canada’s National Roundtable accurately explains that an emission control regime can offer greater price (which equates to revenue) certainty or greater emission reduction certainty. But these are conflicting objectives.

I completely understand why it is prudent for select corporations to lobby for greater price certainty at the expense of emission reduction certainty. What I cannot explain is BC policy-makers’, BC environmentalists’ and many academics’ advocacy which favours price (revenue) certainty over emission reduction certainty.

It is important to note that “price certainty” does not equate to either market efficiency or price optimization.